In India, Betting That $1 Trillion in Investment, And Good Leadership, Can Restore Growth

The citizens of India sure have an odd way of punishing a man who wreaked havoc with their economy: they promoted Pranab Mukherjee from finance minister to president.

One man isn’t responsible for all of India’s woes, of course. The blame for decades of institutionalized neglect, rampant corruption and dismal standings in nutritional rankings must be assigned widely and multigenerationally. But Mukherjee, finance minister from May 2009 until June this year, deserves a disproportionate share of the responsibility among India’s current crop of leaders.

The costs of the favoritism, meddling and short-term thinking that characterized his tenure are still being counted. The 65 percent plunge in foreign direct investment in the second quarter is but one example. Europe’s crisis and turbulence in world markets explain some of the drop, but it’s mostly a referendum on the erratic policies of recent years.

Flip-flops on the tax treatment of multinational companies, opening India’s retail, aviation and pension sectors to greater competition and anticorruption strategies tarnished the economy’s image. Pledges to alleviate poverty in a nation in which 800 million out of 1.2 billion people live on less than $2 a day fell flat.

Creeping inflation isn’t helping. The benchmark wholesale-price index, up 6.9 percent in July, is well above India’s 5.3 percent economic-growth rate. India’s inflation is the highest among the major emerging markets and a slumping rupee is driving up borrowing costs. That is tempting credit-rating companies to downgrade India to junk status.

India deserves better. The good news is it may get it as Palaniappan Chidambaram returns to the job of finance minister. In November 2008, he was moved to the Home Affairs Ministry to strengthen internal security after terrorist attacks in Mumbai left 166 people dead.

Just as you can’t pin all of India’s failings on one man, it’s too much to expect another to right them all. At least Chidambaram and Prime Minister Manmohan Singh are rejoining forces on the economy at the right time. Change is contingent on growth. Without it, political will tends to be in short supply. Growth averaged 8.9 percent a year when Chidambaram last had the finance portfolio and he may be just the man to stabilize things.

Singh, himself a former finance minister, is the development economist who unleashed free-market reforms on the economy. He eliminated layers of red tape and dialed back state-enforced constraints on various industries, paving the way for the rapid growth over the last decade.

As a politician, Singh has sometimes lost the plot. Granted, the mechanics of his coalition government, one that has at times relied on the support of communists, aren’t easy to control. Yet Singh let those pressures distract him from raising living standards for his impoverished masses. At times, he delegated to officials ill-equipped to manage the task. Now that Mukherjee is focused on the largely ceremonial job of president, Singh’s government can get back to business.

Chidambaram’s first job is to end the policy volatility that has sapped market confidence. Just as important is reducing the corruption that keeps the benefits of growth from reaching the vast majority of Indians. Chidambaram must rein in powerful regional leaders such as West Bengal’s Mamata Banerjee. Some believe her efforts to stymie moves to open the economy to foreigners deserve as much of the blame for India’s funk as anything.

The key now is to restore trust in India’s growth story. Given the nation’s demographics and economic potential, investors would be foolish to write off Asia’s third-biggest economy. Yet lots of hard work awaits the country’s political leaders. No challenge is bigger, perhaps, than attracting the investment needed to fill gaps in infrastructure underscored in July by spectacular outages that cut power to almost 700 million people. Moody’s Investors Service says the blackouts had a “credit negative effect” on India.

Increasing India’s share of global manufacturing jobs requires a better power grid and cheaper electricity. It also needs new roads, airport terminals, railways, ports and bridges. India plans to spend about $1 trillion on all this over the next five years. Doing that requires far more foreign investment and that’s why Chidambaram’s return is so timely.

Chidambaram isn’t untouched by controversy. Opponents want an investigation of his role in a 2008 sale of phone licenses that triggered corruption charges and did damage to Singh’s government. We will leave that up to the courts. For now, the focus should be on Chidambaram’s race against time to win fresh investment and strengthen the financial system.

Becoming the first BRIC economy — Brazil, Russia, India, China — to lose its investment-grade rating wouldn’t just be a dubious honor, but the undoing of the “India Shining” narrative that once won over so many investors. Chidambaram must work quickly to get India back on track and Singh should lend firm support to his efforts.

Dropping $1 trillion on physical upgrades is a great start. Putting in charge a policy maker who knows what to do with it is even better.